Disney starts drafting broadcast TV’s grand finale

Broadcast television, once media royalty, may soon be exiled from the Magic Kingdom. Walt Disney (DIS.N) boss Bob Iger signaled as much last month just as wider traditional network viewership dipped below a meaningful threshold. Other conglomerates also will be grappling with a similar decision soon enough, and the financial script is a difficult one to write.

Iger, who started his career at national broadcaster ABC when Americans gathered around bulky sets to watch “Happy Days” and “The Six Million Dollar Man,” spent this summer outlining what he thinks will be the essence of the sprawling $153 billion company he runs. Streaming services Disney+ and Hulu, sports network ESPN, movie studios and theme parks all made the cut. TV stations didn’t. Disney is weighing strategic options for the division, which once turbocharged the company but now threatens to slow it down. A resolution this week with cable carrier Charter Communications (CHTR.O) over programming costs provides a glimpse into the broader implications.

ABC, or the American Broadcasting Company, is one of the “big three” U.S. networks that rose to prominence in the 1950s as TV overtook radio. Along with NBC and CBS, they dominated how Americans consumed news and entertainment at home. It was pretty much the only way to watch “Gunsmoke” or “Howdy Doody” until cable networks arrived in force in the 1980s, bundled together for a monthly subscription fee. The national networks, with Fox added as a fourth by mogul Rupert Murdoch in 1986, were free, with programming beamed over public airwaves and received with rabbit-ear antennas.

For Disney, ABC represented a watershed moment. In 1995, Chief Executive Michael Eisner agreed to buy Capital Cities/ABC for $19 billion. It was the second-largest merger in U.S. history at the time behind the $25 billion buyout of RJR Nabisco. The deal made Disney into a major media conglomerate and brought its future CEO into the fold. By then, Iger was president and chief operating officer of Capital Cities.

CBS and NBC also have been acquisition targets multiple times, ultimately landing with Paramount Global (PARA.O) and Comcast (CMCSA.O), respectively. That Iger might be willing to part with TV assets suggests the cord-cutting era has now spawned the next phase for a dying medium. In the age of streaming video, networks are quickly losing relevance. TV advertising in the United States is forecast to decline to $50 billion this year, from a peak of $62 billion in 2016, according to agency GroupM. The value proposition clearly has changed. At about $183 billion, Netflix’s (NFLX.O) market capitalization is worth nearly as much as Disney, Warner Bros Discovery (WBD.O), Fox (FOXA.O) and Paramount combined.

Extracting as much of what’s left before the decline accelerates is probably a good idea.

TV networks have not yet completely run out of steam. They earn double-digit margins, depending on how it’s sliced. And Americans still watch, but mainly for sports, and more specifically, the National Football League, whose new season kicked off last week. All four networks carry games. Last year, athletic events accounted for 94 of the top 100 most-watched broadcasts. For the second year in a row, scripted programming – such as “Abbott Elementary” and “The Masked Singer” – didn’t crack the list.

The industry’s challenges are nevertheless stiff. While sports are propping up the networks, it’s a tenuous relationship. Strip out the NFL games and average viewership of broadcast TV has plummeted by almost a third since 2015, reckon MoffettNathanson analysts. The dynamic gives the leagues negotiating leverage to keep jacking up prices for the rights to show games. By 2030, sports programming expenses are expected to double to $32 billion annually from 2018’s level, per Morgan Stanley estimates.

Meanwhile, technology goliaths are now looking to score, too. Amazon.com (AMZN.O) is paying the NFL $1 billion annually through the 2033 season to air games on Thursday nights, Bloomberg reported. Apple (AAPL.O) has found some success with soccer. In theory, the iPhone maker could purchase the rights to all major U.S. sports using just 20% of the $167 billion in cash on its balance sheet, a harrowing proposition for the networks considering their dependence on football and others.

Worse, the two main sources of TV revenue are under duress. Advertisers pay to blast commercials to big groups of viewers, but audiences are shrinking. For instance, the percentage of Americans watching traditional TV fell below half for the first time in July while streaming hit a record of nearly 39%, according to media ratings agency Nielsen. Look deeper and the big broadcasters attracted only one in five viewers, while one in three watched cable networks. Ad revenue at Paramount declined by a fifth from 2019 to 2022. In yet another sign of how hard it can be to sell individual TV properties, the company dropped plans to sell its Black-focused network, BET, according to the Wall Street Journal.

Then there are the fees cable operators shell out for the privilege of distributing the network in their bundles, which are pegged to the number of subscribers. Those customers increasingly opt out for streaming services, with a little more than half of households paying for a cable or satellite TV package in the first quarter, according to MoffettNathanson. In 2008, it was nearly 100%. Disney’s recently resolved rift with distributor Charter illustrates the increasing tension.

Fox, which has largely shied away from streaming since selling its entertainment assets to Disney in 2019, is a decent proxy for how the business has held up. The TV group, excluding cable networks such as Fox News, generated an EBITDA margin of nearly 12% for the year ending June 30. A decade earlier, it was 16%.

Beyond the weakening financial outlook, other quirky aspects threaten to gum up any strategic shift. For one thing, the U.S. Federal Communications Commission prohibits a merger between any two of the big four networks, limiting consolidation possibilities. Local TV companies such as Tegna (TGNA.N) might be potential suitors if they could afford ABC or one of its peers, but they’re also constrained by federal regulations that prevent any single one from owning or controlling stations that reach more than 39% of TV households.

With a shrunken pool of potential buyers, it’s understandable that Iger might seek a partner instead. Disney’s media assets, while in decline, also won’t come cheap. Assume any deal includes cable networks such as Disney Channel and National Geographic. These broadcasters, including ESPN, are expected by analysts to bring in $6.2 billion of EBITDA in 2025, according to LSEG. The Fox enterprise is valued at a multiple of 6 times the same measure of profit. On that basis, Disney’s would be worth some $37 billion.

The figure, however, is heavily skewed by ESPN. The sports broadcasting network generates approximately 60% of the group’s EBITDA, reckons Morgan Stanley. Strip out that amount and Disney’s TV channels, including ABC, are probably worth closer to $15 billion.

Disney could spin off the assets to its shareholders, but doing so would put the valuation at risk given the industry dynamics. To help prevent that from happening, a separation backed by a private equity firm such as Apollo Global Management (APO.N) or TPG (TPG.O) acquiring up to a 49.9% stake would be a smarter option. Buyout shops would be all too happy to lard on some debt in exchange for the TV cash flow, even if the sum is gradually shrinking.

Any structure will be messy. Affiliate TV stations linked to ABC might balk at a new owner. Disney will have to devise a way to ensure it has access to a pipeline of programming for its streaming services. The revenue picture is getting blurry, too. It would have been hard to imagine back in 1948 when ABC aired its first program and the magic of television was blowing people’s minds, but Iger has started drafting what might just be the beginning of the end for linear TV. Reuters